House #8 – 23307 Pinery Riverbed – A Rental House with the Tenant Included!
May 2014
A few weeks after we added house #7 to the farm, we came across another fantastic deal in 23307 Pinery Riverbed. This property was a four-bedroom, two-bath house close to our foundation project house. It was an investor/contractor who had bought it and fixed it up and was ready to take some profits. The property already had a tenant in it and was in what we thought was good shape. The house even had a new roof and carpet.
Buying a House With a Tenant
Unfortunately, the tenant was a friend of the seller, and so he was giving them a “deal” on rent. I think they were paying only $900. They should’ve been closer to $1100 per month. Luckily the tenant was on a month to month lease, or we would’ve been stuck with the $900 until the tenant’s existing contract had run its course.
PRO TIP – IF you buy a home with an existing tenant, just because the ownership changes, you can’t change their lease easily.
We told the tenant we were raising the rent. Of course, they were not happy with this decision, but we talked with them at length and showed them other comparable rent houses in the neighborhood and for how much they rented. At first, they threatened to move, but as is usually the case, they decided to stay, and they signed a new lease.
Moving costs are high and would cause change and other unwanted “friction.” Therefore, unless they can’t afford it and must leave, more often than not, a tenant will stay when you raise the rent.
Deposit Logistics
We also determined that the tenant had never paid a deposit when they moved in since the owner was a family friend. Usually, when you buy a property with an existing tenant, the owner has to transfer the deposit over to the new owner. Since there was no deposit in this case, and we had no plans to buy a house with a tenant with no deposit, we required the tenant to pay $1,100 as well to satisfy a deposit. We do this, of course, to protect us in case the tenant causes significant damage to the property when they move out.
The irony of this, of course, is that when the tenant moved out, we took their deposit because of significant damage to walls and carpet, and trash left behind. It’s a good thing we got that deposit up front!
Purchase and Financing
We got this property under contract for $80,000. Zillow had it at $110,000. We got it into an 80/20 loan for 20 years. Bazinga! This amount means we needed about $16,000 to close this property. The only repairs it required was a garage door fix, and some plumbing odds and ends.
More Repairs
Now you know we don’t do inspections here at the stealthy rich, and there are a few reasons for that.
- They are expensive, roughly 400-500 dollars to get a comprehensive report.
- Sometimes they scare our potential sellers as its other potential bump in the road to closing.
- Most problems we can detect ourselves, and we trust our gut.
- $5,000 – That’s basically what we at the stealthy rich think any major problem could cost. So even if we failed to catch a bad roof or some major plumbing problem, at most, it’s only going to cost about $5,000, which is within our risk tolerances.
- We have gotten pretty good at on the surface, checking things like roof age, HVAC age, foundation problems, water heater, appliances, etc. With a quick 20 minute walk-through, we know what we are getting ourselves into with about 90% certainty. If we miss something, we know it’s going to at most cost us about 5k.
With that said, a few months after we had this house locked up, the AC started to fail. Our trusty guy, Agustin, went over and told us the coil inside the attic was from a mobile home! This coil should’ve never been installed as it was a band-aid the prior landlord had put in. Agustin is our man and replaced it all for $2500. We also discovered a significant drainage issue with this house as water would seep into the master bedroom when it rained super hard. I’ll explain the nightmare of fixing this in another post, but it was about another $2500 to fix this. So see we got a two for one here as both of these added up to 5k, which is right within our margin for unplanned capital expenses. Since these expenses happened later in the year, I didn’t count them in the acquisition costs in the chart below.
House Pics
Lessons Learned
On this house, we dove into buying a property with an existing tenant. Not scary at all, especially if they are on month-to-month. If they hate your new terms, they can move. Then you have an empty house anyway! Just make sure to account for any make-ready after it’s empty so you can get it prepared for the next one. We also learned to make sure and check out the attic to take a peek at the HVAC and not to only look at the outside condenser. Moreover, these tenants only spoke Spanish, so thankfully, I’m fluent in Spanish.
Let’s Do the Numbers
This one turned out to be good up front. It had a rent to purchase ratio of about 1.34. Solid play for sure.
| Line Item Detail | Amount | Comment |
|---|---|---|
| Purchase Price | $80,000 | |
| Down payment 15% | $16,000 | 20% down on a Portfolio Loan from a local bank |
| Closing costs which included first year of insurance | $1000 | Closing cost - we had a lot of prorations with property tax, so it kept closing costs low |
| Rehab Costs | $500 | Garage door, minor plumbing fixes |
| Total cost of deal | $81,500 | Includes rehab |
| Anticipated Rent | $1,100 | |
| Monthly Mortgage | $430 | portfolio loan 20 years at |
| Anticipated monthly Expense | $200 | Average of $2400 a year in expenses |
| Taxes and insurance | $250 | |
| Monthly cash flow | $220 | This does not include the principal pay down which is built into the loan, we also plan to raise rent even more next year. |
| Rent to Purchase price Ratio | 1.34% | This one is really good! 1.34 Solid standup double if we translate this to a trusty baseball metaphor. |
Net Worth Update
I jumped up almost 20k on this house. I am now up to nearly $240,000. Especially since it’s only now split two ways, the snowball of money is starting to take shape now. Each house each month is starting to add cash flow to the net worth each month as well.
Those are crazy numbers. I can’t even hit 1% properties in LA!!!